While controls on short-term capital inflows in Thailand have succeeded in stemming further speculative inflows, they could also trigger a pull-out of foreign funds already invested in the Kingdom, says a report published today by Standard and Poor's Ratings Services.

Entitled "Capital Controls Come at a Cost to Thailand", the report also reveals that the country's new capital controls have spawned tighter domestic financing conditions, harmed the Bank of Thailand's reputation, and made investors cautious.

"Foreign investors will now be far more wary of investing in Thai financial markets," said Standard and Poor's credit analyst Kim Eng Tan. "This will lead to higher funding costs in the Kingdom, with negative implications for the prices of debt and equity assets.

"Although this should not harm Thai economic prospects in the near term, it could adversely affect domestic investment if planned government capital spending leads to the reappearance of current account deficits. This is because such deficits would increase Thailand's reliance on foreign financing."

 The Bank of Thailand's latest controls initially triggered a wave of volatility across Asian financial markets, accentuated by the seasonally low liquidity in most financial markets as traders closed their books for the year. The disruption came at a time of significant concern regarding near-term market conditions, with an expected slowdown in global economic growth in 2007

Nevertheless, although the losses in Thailand outpaced those of elsewhere, most markets have since recovered. Moreover, the implementation of capital controls in Thailand is unlikely to heighten perceptions of risk in Asian markets, as financial market volatility is likely to dissipate in the short-term unless the region suffers another significant negative shock or abrupt policy adjustments, said S&P.

"Barring a further significant negative shock, the volatility in Asian financial markets should subside in the near term," said Kim Eng Tan. "The healthier external balance sheets of both Asian central banks and corporations also make the recurrence of a 1997-type financial crisis unlikely.

Asked to comment on the S&P report, Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula dismissed the notion that the S&P might have lowered the rating of Thailand.

"Normally, the credit-rating agencies would assess an incident in a country. It would not affect the credit rating of Thailand. The measure had a short-term impact.

S&P also urged Asian governments to balance their instincts against exchange rate volatility and appreciation, as well as the need to focus on the fundamental determinants of competitiveness.

However, Deputy Prime Minister and Industry Minister Kosit Panpiamras said the coordination of policy might be difficult to be realised because each country has to take care of itself. He added a decision to adjust credit rating would certainly affect the cost of businesses in raising funds.

S&P gave Thailand's foreign

currency a rating of BBB+ (long-term) and A-2 (short-term), while the local currency rating is rated A (long-term) and A-1 (short-term). The long-term rating outlook is rated stable.

Some foreign investors yesterday pulled their money out of the country after Black Tuesday. The baht fell against the dollar, closing at 36.42-44 from Wednesday's 35.80-90.

Demand for dollars yesterday increased as foreigners reduced portfolios in the Thai equity bourse and Thai importers bought dollars as they were afraid of the weaker baht. But, on the other hand, some exporters are satisfied by an appropriate rate of exchange and have sold out their foreign-currency incomes.

BOT governor Tarisa Watanagase said the weakening baht was caused by foreigners selling out Thai stocks. This was in line with the central bank's purpose to halt the rapid appreciation of the baht.

Earlier, the baht had rapidly headed north no matter which direction the dollar moved, while other Asian currencies have shifted in a reverse path of the dollar.

"The measure helped to break the one-way direction of the baht and the momentum has already ceased. The baht is not weakening too rapidly now. We continue to closely monitor it," said the governor.

Aside the action of foreign investors, the weak baht was also a result of importers' purchases of the dollar for goods and service payments. But the demand for the dollar was not too high, said Pongpen Ruengvirayudh, the BOT's senior director of the Financial Markets Operations Group.

Tarisa believes some foreign investors, who have already sold out Thai stocks, continue to park their money domestically and wait for the proper time of the bourse to recover. She had a talk with a long-term foreign fund operator, which was satisfied with the drawback policy and decided to maintain its money in the Kingdom

The governor said that the efficiency of the reserve requirement measure would be apparently seen at the beginning of next year because the market turnover was currently too thin to reflect the actual transactions due to the holiday season.

Meanwhile, the Bank of Thailand also issued an announcement on their website on December 21 stating that property including land and condominiums is exempt from the reserve requirement on short-term capital inflows.

Foreign purchasers of condominiums can bring funds into Thailand to purchase condominium property. According to a major local bank, foreign condominium purchasers should clearly state the project name and unit number when remitting funds.

Aliwassa Pathnadabutr, managing director of CB Richard Ellis Thailand, said that the company welcomes this clarification, which means that foreign property purchasers are not affected by the new regulations.

"We believe that this will reassure existing and potential property purchasers," she added

There are still many foreigners who want to purchase condominiums in Thailand both to live in and as long-term investment. The rental market remains strong and the prospects for capital appreciation are good for projects in locations with limited supply and a scarcity of development sites.

The negative impact on the real estate sector following currency controls recently introduced by the BOT has become evident. A number of foreign investors planning to conclude major acquisitions in the Thai property market before Christmas have immediately put their plans on hold, says Longlom Bunnag, chairman of Jones Lang LaSalle.

Foreign investors' sentiment and confidence were negatively affected by the BOT's action on currency controls. Though BOT announced that the currency control measure would not apply to foreign investment in the property sector, this has apparently failed to restore the confidence of foreign investors in the Thai property sector.

"All overseas investors who we are dealing with in the process of acquiring property in Thailand have immediately ceased their plans and applied a 'wait and see' approach. Though we believe that these investors remain keen to invest in the Thai property market, it will likely take some time before foreign investment activity in the market resumes, at least until the Thai government finds out how to reinstate foreign investors' confidence," said Longlom.

Some foreign investors who are less concerned by the BOT's action have also held on their investment decision, waiting to see where the Thai currency is going.

"If the baht currency is weakened by the BOT's measure, this means foreign investors will pay less for the assets they plan to acquire in the Thai property market," Longlom added.